What Is Component Auditing?

Introduction

Component auditing refers to the process of auditing part of a group entity—such as a subsidiary, division, branch, or geographic unit—for inclusion in the group’s consolidated financial statements. This is a common practice in multinational corporations or organizations with complex group structures.

Group audits often require the involvement of multiple audit teams across jurisdictions. Component auditors play a key role by auditing specific pieces of the overall group and providing the necessary assurance over those areas. Their work feeds into the group auditor’s opinion on the consolidated financial statements.

What Is the Role of a Component Auditor?

A component auditor is responsible for performing audit procedures on a defined entity, location, or function at the request of the group auditor. Their responsibilities include:

• Testing financial statement elements (e.g., revenue, inventory, fixed assets) that are specific to the component
• Communicating audit findings, issues, and significant risks back to the group audit team
• Providing audit documentation and written communication for use in the group auditor’s overall audit strategy and conclusions

Group auditors are expected to plan, coordinate, and evaluate the work of component auditors in line with professional standards such as ISA 600 (Revised) and PCAOB AS 1201, ensuring audit quality and consistency.

Is a Component Auditor Part of the Engagement Team?

This depends on the audit framework and the extent of the group auditor’s involvement in the component audit work.

• Under ISA 600 (Revised): If the group auditor takes responsibility for the component auditor's work (i.e., directs, supervises, and reviews it), the component auditor is considered part of the group engagement team.
• Under PCAOB AS 1201: A similar principle applies—if the group auditor uses the component auditor’s work without making reference to them in the report, they are treated as part of the engagement team.

However, if the component auditor works more autonomously and the group auditor refers to their report, they are not considered part of the engagement team. This distinction affects the level of review, documentation access, and responsibilities involved.

What Is the Difference Between a Referred-To Auditor and a Component Auditor?

Understanding this distinction helps ensure proper audit strategy, documentation, and compliance with applicable auditing standards.

Who Appoints the Component Auditor?

The group auditor typically selects or approves the component auditor as part of the group audit plan. However, in many cases, a pre-existing local auditor (e.g., the statutory auditor of a foreign subsidiary) may already be in place.

In these situations, the group auditor must decide whether to:

• Take responsibility for the component auditor’s work by integrating and supervising it, or
• Refer to the component auditor’s work in the group audit opinion, explicitly noting the reliance placed on their report

This decision is influenced by factors such as audit risk, materiality, jurisdiction, regulatory requirements, and access to information.

Best Practices for Coordinating with Component Auditors

For group auditors, effective collaboration with component auditors is critical. Here are best practices to follow:

• Provide clear instructions: Include component-specific audit procedures, reporting deadlines, and documentation expectations
• Access working papers: Obtain and review relevant work to ensure audit quality
• Perform quality reviews: Especially when taking responsibility for their work
• Understand local standards: Address differences in GAAP, auditing practices, and regulatory compliance
• Evaluate the structure: Make a strategic decision whether to integrate the component auditor or refer to their work

Proactive communication and robust audit planning reduce the risk of misalignment and ensure audit objectives are met across all components.

Conclusion

Component auditors are vital contributors to the success of group audits, particularly in global organizations with diverse operations. Their work ensures that each part of the business is appropriately audited and that the group auditor can form a reliable opinion on the consolidated financial statements.

Understanding the difference between component auditors and referred-to auditors, as well as whether they are part of the engagement team, is key for planning and executing a high-quality, standards-compliant group audit.

Need support on your next multi-entity audit? Contact our team to learn more about how we help audit firms and finance leaders manage integrated audit engagements.

FAQs

What is the difference between a referred-to auditor and a component auditor?

A referred-to auditor is explicitly named in the audit report, with the group auditor relying on their opinion. A component auditor’s work is integrated and may be supervised by the group auditor.

Is a component auditor part of the engagement team?

They may be, depending on the extent of the group auditor’s supervision and integration of their work.

What is the role of a component auditor?

They perform audit procedures on a specific part of the group and report findings to the group auditor for consolidation.

Who appoints the component auditor?

Typically, the group auditor selects or approves them, though existing local auditors may also be used depending on the strategy.